Allison Dukes
Chief Financial Officer at Invesco
Thank you, Marty, and good everyone. I'll start with Slide 4. Our investment performance continue to be solid in the first quarter with 59% and 68% of actively managed funds in the top half of peers or beating benchmark on a 5-year and a 10-year basis. These results reflect continued strength in fixed income, balanced products and Asian equities, all areas where we continue to see demand from clients globally.
Moving to Slide 5. We ended the quarter with $1.6 trillion in AUM, a decrease of $55 billion from December 31. And as Marty noted earlier, our diversified platform generated net long-term inflows in the first quarter of $17.2 billion, representing nearly 6% annualized organic growth. Active AUM net long-term inflows were $800 million and passive AUM net long-term inflows were $16.4 billion. Despite the inflows, market declines and FX rate changes led to a decrease in AUM of $85 billion in the quarter. The retail channel generated net long-term inflows of $10.4 billion in the first quarter, driven by inflows and the global ETF products. The institutional channel demonstrated the breadth of our platform and generated net long-term inflows of $6.8 billion with diverse mandates both regionally and by capabilities funding in the period. Regarding retail net inflows, our ETF capabilities generated net inflows of $19.2 billion. Excluding the QQQ our net long-term inflows were $18.7 billion.
I'll provide a little more commentary on our global ETF platform on the next several slides. But before I do, let me take a moment and touch on flows by both geography and asset class on Slide 6. You'll note that the Americas had net long-term inflows of $7.9 billion in the quarter. While we saw strength in ETFs and our institutional business, we did see pressure from select active equity strategies, including developing markets and the diversified dividend funds. Asia Pacific saw net long-term inflows of $5.6 billion, representing organic growth of 11%. Net inflows were diversified across the region and included $3.2 billion of net long-term inflows from Invesco Great Wall, our joint venture in China.
EMEA, excluding the U.K. also delivered a strong quarter of net long-term inflows totaling $5.9 billion, representing organic growth of 16%. This was driven by strength in ETF and sales of senior loan products. From an asset class perspective, we continued to see broad strength in fixed income in the first quarter with net long-term inflows of $4.8 billion. Drivers of fixed income flows included institutional net flows into various fixed income strategies through our China JV, global investment grade, stable value and various fixed income ETF strategies. Our alternative asset class holds many different capabilities, and this is reflective in the strong flows we saw in the first quarter. Net long-term inflows and alternatives were $7.6 billion, representing organic growth of 15% and was driven primarily by our private credit business. This included two newly launched CLOs and net long-term inflows into our senior loan capabilities.
In addition, we saw net inflows into commodity ETF in both the Americas and EMEA. When excluding global GTR net outflows of $1.6 billion, alternative net long-term inflows were over $9 billion. Strength of our alternatives platform can be seen through the flows that is generated over the past five quarters with net long-term inflows totaling nearly $27 billion, representing a 12% organic growth rate over this time when excluding the impact of the GTR net outflows.
Now, moving to Slide 7, as Marty noted earlier, given the strong growth in our ETFs and other index capabilities, we wanted to provide a little more detail -- a more detailed view on the business. With over 15 years of experience managing indexed assets and a team of seasoned ETF professionals in different strategic region, Invesco's index business has always differentiated itself due to the innovative and value-added nature of our products. Examples of this include first to market types of products like the Invesco senior loan ETF, distinctive families of ETF, like the low volatility suite, the bullet share ETFs and our diversified range of commodity pools. We created the fast growing QQQ innovation suite just a little over one year ago and it has grown to $5.4 billion at the end of the first quarter. We manage $528 billion in ETFs and other indexed capabilities. The platform is diversified in terms of strategies, asset classes and client geographies. Over the last 12 months, net inflows into ETFs and other index capabilities were $87 billion, a 21% growth rate. Net inflows into global ETF over this period were $66 billion, which is a growth rate of 17% and new fees from these flows were $130 million, a 16% increase over the prior 12 months.
Now, turning to Slide 8. Over the past five quarters the ETF industry has seen over $1 trillion of net inflows, a 12% growth rate. Over the same period Invesco 17% growth rate has exceeded that of the industry. In addition, our market share of flows has exceeded our market share of ending AUM for four of the last five quarters, increasing our overall global ETF market share a 40 basis points over this period to 4.9%.
Moving to Slide 9, Invesco is the 4th largest ETF AUM advisor globally. Our platform is much more diverse than just both beta. We continue to innovate our product line, focusing on specialized strategies and growth areas, such as smart beta, commodities, fixed income and more niche traditional beta. These capabilities carry higher fee rates compared to both beta fee rates. On a fee basis, we ranked 4th in the industry with a 5.6% market share of annual fees. Given the commoditized nature of both beta product almost 60% of the industry ETF AUM carries a fee rate of less than 10 basis points. In contrast, our ETF capabilities are anchored on strategies that help investors achieve targeted investment goal.
The value-add proposition of our ETF business is expressed through sought after products. If you exclude the QQQ, over 90% of our ETF AUM has a fee rate 10 basis points or higher with the average fee rate being 33 basis points. Our ETF flows in the first quarter were also differentiated with over 80% of our ETF net inflows being in products that carry us fee rate of 10 basis points or higher. Looking at net flows in these higher fee products, our market share was nearly 14% of the industry, almost 3 times our market share of ending AUM.
Slide 10 shows that the ETF industry is expected to almost double in size to $18 trillion or 18% annually by 2025. Invesco is well positioned to continue to gain market share. With our global scale as well as being a leader in commodities, smart beta fixed income and our focus on innovative and thematic offerings such as the QQQ innovation suite and ESD products, we are positioned to capture client demand around the globe. Our ability to capture flows in excess of our market share is driven by a number of factors including our understanding of markets and clients, multi-decade ETF relationships in institutional and wealth management channels, a fast growing European ETF product lineup that is now the second fastest growing ETF business in the region and our ability to build loyalty with a new generation of retail investors.
Finally, the brand recognition of the QQQ elevates Invesco's visibility in the global ETF market. The QQQ product has become the 5th largest ETF globally as popularity is furred growth in the rest of our global ETF platform and laid the groundwork for the launch of adjacent fee-generating products as part of the QQQ innovation suite. We launched that suite in October 2020 and it has been highly successful growing to $5.4 billion by the end of the first quarter as I previously noted.
Now, moving to Slide 11. Our institutional pipeline was $29 billion at quarter end, consistent with the prior quarter level. Pipeline remains strong and has been running in the $25 billion to $35 billion range, dating back to late 2019. Pipeline also remains relatively consistent to prior quarter levels in terms of fee composition. Overall, the pipeline is diversified across asset classes and geographies. Our solutions capability enabled 30% of the global institutional pipeline and created wins and customized mandates. This has contributed to meaningful growth across our institutional networks.
Turning to Slide 12, market volatility had a significant impact on our first quarter net revenue. This is most evident in the $93 million decline in investment management fees from the fourth quarter as noted on the slide. As prior quarters leading up to the first quarter, we have been generating strong year-over-year net revenue growth, growing at a 17% rate in the second half of 2021. This was being driven by both strong markets and organic growth. As the first quarter unfolded, pressure from market volatility negatively impacted net revenues. As a result, our net revenue were essentially flat year-over-year. We did see improvement in money market fee waivers during the quarter, a short-term rates increased and the Fed raised rates 25 basis points in mid-March. The net money market fee waiver impact had been running in the $20 million to $25 million range per quarter. The impact declined to $12 million in the first quarter. We expect the impact will decline to near $5 million in the second quarter and by the third quarter we expect little to no impact for money market waivers.
Total adjusted operating expenses were up about $10 million or 1% as compared to the first quarter of 2021. $6 million of the increase was due to certain changes to the pricing of transfer agency services that we provided -- that we provide to our funds, which went into the effect -- which went into effect in the third quarter of last year. The increase impacted property office and technology expenses, which was offset by a corresponding increase in service and distribution revenue. Taking this into account, adjusted operating expenses were essentially flat year-over-year. Reductions in employee compensation were offset by higher marketing and G&A expenses partly due to higher reopening activity in these areas as compared to the first quarter of 2021 when there was no travel. Going forward, the degree of activity in these areas is expected to increase as travel continues to come back.
Moving to Slide 13, we're very close to our goal of achieving $200 million in net savings this year. In the first quarter, we realized an additional $6.4 million in cost savings. $3 million of the savings is related to compensation expense and $3 million related to a reduction in property expense as we continue to right size our facilities portfolio. The $6 million in cost savings of $26 million annualized combined with the $167 million in annualized savings realized through 2021 brings us $193 million in total or 96% of our $200 million net savings expectation. In the first quarter, we incurred $22 million of restructuring costs related to this initiative. In total, we recognized approximately $240 million of our estimated $250 million to $275 million in restructuring cost associated with the program. We expect the remaining restructuring costs for the realization of the program to be up to $35 million. As a reminder, the costs associated with the strategic evaluation are not reflected in our non-GAAP results.
Now, moving to Slide 14, adjusted operating income decreased $8 million from the first quarter of last year to $495 million driven by the factors I previously noted. Adjusted operating margin was 39.5%, slightly lower than the first quarter of last year. EPS was $0.56 versus $0.68 a share last year with the main driver being lower non-operating income. In the first quarter of 2021, equity in earnings of unconsolidated affiliates was $37 million, favorably impacted by the improving CLO valuations at the time as compared to $4 million in the first quarter of 2022. Other gains and losses declined $30 million from last year to a loss of $20 million in the first quarter of 2022 driven by lower mark-to-market valuations of our seed capital due to negative market performance. The effective tax rate was 24.2% in the first quarter. We estimate our non-GAAP effective tax rate to be between 24% and 25% for the second quarter of 2022. The actual effective rate may vary from this estimate due to the impact of non-recurring items on pre-tax income and discrete tax item.
Slide 15 illustrates our ability to drive adjusted operating margin expansion against the backdrop of the client demand driven change in our AUM mix and the resulting impact on our net revenue yield. Our operating margin two years ago in the first quarter of 2020 was 36%. At that time, we reported a net revenue yield ex-performance fees and excluding the QQQ of 41.8 basis points. In the first quarter 2022, our net revenue yield declined 5.2 basis points to 36.6 basis points, yet our operating margin has improved to 39.5%. We've been building out our product suite to meet client demand and client demand has been skewed towards lower fee passive products as evident by the mix shift between active and passive of AUM. Realizing our business mix is shifting, we continue to be focused on aligning our expense base with these changes. This has enabled the firm to improve and maintain a strong operating margin despite the client demand driven decline in net revenue yields.
Now, if you comment on Slide 16, our balance sheet, cash position was $1.3 billion at March 31 and approximately $708 million of this cash is held for regulatory requirements. The cash position improved from the first quarter of '21, even as we deployed $100 million in cash to fund share buybacks in the first quarter. Our leverage ratio, as defined under our credit facility agreement, was 0.8 times at the end of the quarter and if you choose to include the preferred stock, the leverage ratio was 2.5 times, both seeing substantial improvements in our leverage profile over the past year. As Marty noted earlier, our stronger balance sheet and financial flexibility put us in position to capitalize on an economically attractive opportunity to early redeem the $600 million of senior notes that have a maturity date of November 30 of this year.
Our short-term interest rates increased in the first quarter the make whole related to an early redemption of the debt became attractive enough to provide a financial benefit to redeem the debt early and it will be fully redeemed on May 6. This will save us approximately $11 million in interest expense over the period beginning in early May through what would have been the November 30 maturity date. The make whole and another fees will be approximately $5 million based on current indications and these will be recognized at the time of redemption, but the savings and the fees will impact interest expense. With respect to our capital strategy, we are committed to a sustainable dividend and to returning capital to shareholders through a combination of modestly increasing dividends and share repurchases. As we stated, we intend to build towards a 30% to 50% total payout ratio over the next several years. We completed the previously announced share buyback of $200 million in the first quarter and our Board approved a 10% increase in our quarterly common dividend.
Overall, we believe we're making solid progress in our efforts to improve liquidity and build financial flexibility and our first quarter results demonstrate that progress. We remain focused on executing the strategy that aligns with our key areas of focus, continuing to invest ahead of client demand in these areas. At the same time, we're focused on optimizing our organizational model and disciplined expense management. This approach has resulted in a stronger and more resilient operating margin. This has also facilitated stronger cash flows, further strengthening our balance sheet and driving the improvement in our leverage profile, putting us in position to capitalize on opportunities such as the early debt reduction. As we look toward the future, Invesco is in a strong position to deliver value over the long run to all of our stakeholders.
And with that, I'll ask the operator to open up the line for Q&A.
